Aereo: Streaming TV startup at center of media storm

Cable subscribers are fed up with paying for channels they don't want. But solving the problem involves battling a powerful broadcast industry and murky legal issues.

That's why Chet Kanojia isn't surprised that his startup Aereo, a streaming service for live broadcast TV (but not cable), has attracted controversy. And lawsuits.

Kanojia is very familiar with how the traditional broadcast TV business works. He worked with many of the bigwigs before selling his TV advertising startup Navic Networks to Microsoft(MSFT) in 2008, so he figured they wouldn't be pleased with his new idea: a service called Aereo.

Aereo lets subscribers watch live broadcast TV on Internet-connected devices, or record shows to watch later. Occasional viewers can buy a $1 day pass (recordings are stored for 10 days), while heavier users can purchase an $8 or $12 monthly package or an $80 annual subscription.

Before Aereo launched in New York in early 2012, Kanojia and his team made the rounds at broadcasters' offices to explain the approach. None of them cheered Aereo, but Kanojia wasn't waiting for broadcaster approval to move forward.He had already scored financial backing, and he had confidence that he was on solid legal ground.

"We expected it to be controversial," Kanojia says. "But we went in with an open kimono, and explained what we were doing. Some were appreciative. Some were more, 'Hmm. I wonder what this means for us.' And some were in disbelief, saying we were lying or exaggerating about what we created."

After Aereo's New York launch, most of the major broadcast networks and local TV station owners quickly filed copyright infringement lawsuits against Aereo, including ABC parent Disney(DIS), CBS(CBS), Fox owner News Corp.(NWS) and Comcast's(CMCSA) NBC Universal. (CNNMoney parent company Time Warner(TWX) is not involved in any litigation against the company.)

Aereo's defense is its technical setup, which the company insists makes its service legal. It houses thousands of tiny antennas in its data centers, and it assigns each customer a unique antenna. Aereo argues that the service works just like a legal DVR. Broadcasters say it's an unfair dodge based on a technicality, and Aereo should have to pay them to re-transmit their programming.

It's early in the court process, but the first ruling has already gone Aereo's way. Last July, a Manhattan federal court denied the broadcasters' request for a temporary injunction to shut Aereo down. Judge Alison Nathanagreed with Aereo's "we're like a DVR" defense, citing a 2008 case in which Cablevision(CVC) won on those grounds.

Broadcasters have vowed that the legal war is not over. But it was an important battle for Aereo to win. Barry Diller, who became an Aereo board member last year after his company IAC(IACI) led a first round of funding, told The New York Times Aereo could not have survived if the judge had granted the injunction.

Instead, the injunction strikedown gave Diller the confidence to move forward with a second round of funding, he told the Times.

Aereo's other existing investors, including Highland Capital Partners and FirstMark Capital, joined IAC in a $38 million round of funding last month. The company is using that money to launch in 22 new U.S. cities, including Atlanta, Boston, Philadelphia, Dallas, and Houston, later this year.

In the meantime, Aereo will continue fighting its New York-based legal war and potentially face more. It is notably avoiding California, where it may face a chillier legal climate in the entertainment capital of Los Angeles. In December, an L.A. court ruled against an unsubtly named knock-off service of Aereo called "Aereokiller," granting a preliminary injunction to shut it down. The judge's decision acknowledged the conflicting legal views different jurisdictions appear to have regarding systems like Aereo's.

However Aereo's legal battles shake out, Kanojia believes he has the high ground.

"This is a moral crusade for me as a consumer, not even as a businessman," Kanojia says. "We wanted to give consumers a choice, and show that things don't have to be the way they are. In that sense, I feel that we've already won."